Paying a dividend can be quite the commitment. Although it's discretionary, once a business starts paying a dividend, the expectation is that it will continue to pay that dividend. If dividend payouts stop, investors often take that as a sign that there are problems with the company and its profitability prospects.
For that reason, many growth-oriented businesses prefer share buybacks instead of dividends. In recent years, T-Mobile US (TMUS 1.14%) has been focused on growth; so, paying a dividend hasn't been part of its strategy before. That, however, is about to change.
T-Mobile to pay $3 billion in dividends per year
Earlier this month, T-Mobile CEO Mike Sievert said that as part of the company's plan to provide shareholder returns, it is going to pay $3 billion in dividends over the course of a year. Investors should expect the first dividend declaration and payment to come before the end of 2023.
The company has approximately 1.2 billion shares outstanding, which means that the dividend would total $2.50 per share for a full year. Based on last week's closing price of just over $139, that puts the prospective yield at approximately 1.8%. That's far lower than that of rivals Verizon Communications and AT&T, which yield 8% and 7.3%, respectively.
NASDAQ: TMUS
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There's room for dividend hikes, too
Although that 1.8% yield may seem fairly light, it's worth noting that T-Mobile isn't expecting to keep that yield static. In fact, dividend boosts are highly probable because T-Mobile generates plenty of free cash flow, which supports raising dividends. This year, the company expects its adjusted free cash flow to be at least $13.2 billion. If T-Mobile can continue to post solid results like that in the future, there shouldn't be any problem with not only paying the dividend but increasing it.
The telecom plans to do just that, with Sievert saying that the goal is to boost its dividend by 10% annually. If T-Mobile were to average a 10% increase every year, then it would take approximately eight years for the payout to double. By comparison, Verizon recently hiked its dividend payment by 1.9% and AT&T hasn't made an increase in the past year.
Does the dividend make T-Mobile a better buy than its peers?
T-Mobile's stock has been flat so far this year, but that's still a better performance than what Verizon and AT&T have posted, with both down more than 15%. Still, business has seen a noticeable slowdown lately. As you can see in the chart below, T-Mobile's quarterly revenue growth has fallen noticeably since the start of the year.
VZ Revenue (Quarterly YoY Growth) data by YCharts
By paying a dividend, T-Mobile can alleviate some of the pressure of having to generate much growth. This can be a way for the company to subtly hint to investors that its fast-growth days may be behind it. While Sievert says, "We're outperforming this whole sector on growth," the future still may be a bit more challenging because it will no longer benefit from the tailwinds of its merger with Sprint.
Valuation is another factor worth watching. T-Mobile investors have been paying a premium for the stock, and even today, it's still expensive. Taking into account the company's future earnings, which are based on analyst expectations, the shares still look pricey. T-Mobile's forward price-to-earnings ratio is hovering around 17, whereas competitors AT&T and Verizon are trading at multiples that are much easier to stomach (around 6 and 7, respectively).
VZ PE Ratio (Forward) data by YCharts
Is T-Mobile stock a buy?
While T-Mobile has done well in growing its business and becoming larger through the merger with Sprint, paying a significant premium over its rivals in the future may not make a whole lot of sense, especially if things slow down for the company, which is what appears to already be happening.
Although it's a good business and initiating a dividend is great news, investors may want to hold off until T-Mobile is trading at a more reasonable price tag. Paying out a dividend is a positive for T-Mobile because it indicates an expectation of consistent profitability, but it may also signal an end to the company's high-growth days. Over time, I would expect to see its valuation come down closer to that of its rivals -- patient investors would be smart to wait until that happens before buying into the stock.
